A professional investor tells us where he'd put his money. This week: Alex Barr of the Henderson Alternative Strategies Trust highlights three favourites.
"Alternatives" continue to be one of the smaller pieces of the pie chart in many end-of-year asset-allocation reports. This is an ironic anomaly given that alternative investments such as private equity or commodities are one of the oldest forms of investment and are often uncorrelated to the movements of traditional assets such as stocks or bonds. That means they can help investors diversify and dampen a portfolio's overall volatility. We have seen many new alternative genres emerge.
Often the right strategy is to let other investors learn the hard way first. The real risks may not be the elaborate ones listed in the placing memoranda, but rather the common-sense ones. Investment processes that emphasise diligence, debate and scenario analysis should pick up on these.
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We deploy our investors' capital across a spread of strategies, and our single biggest exposure is private markets, mostly accessed through liquid or tradeable securities. This broad sector offers different shades of return profile and cash flow, but is characterised by underlying investments that are harder to research as there is little public information available about them. This can lower valuations, mitigating the risk of overpaying.
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Harbourvest: a triple play on private equity
I first met the Harbourvest Global Private Equity Ltd (LSE: HVPE) team in 2010 when its initial public offering (IPO) took place. It follows a triple strategy. Firstly, it invests (via its own limited-partnership fund of funds) in other private-equity managers' funds; these include some exceptionally tough funds to access, such as Index Ventures, which has had several unicorns (tech start-ups that reach a valuation of $1bn). Harbourvest also opts for direct co-investments (minority stakes in companies) as well as secondary investments (private-equity fund interests acquired from other investors after the fund's original fund-raising). This strategy accounts for around a third of its portfolio, and it takes advantage of current discounted pricing for secondary positions in private-equity funds of funds.
Oakley Capital Investments: a short- and-long-term bet
Oakley Capital Investments Ltd (LSE: OCI) is also a listed private-equity vehicle. Our shorter-term investment rationale focuses on the positive governance steps the manager has taken to improve the wide discount at which it trades, while the recent placing of Woodford Investment Management's full holding of Oakley has lifted a liquidity overhang which, until then, had been seen as negative and dented sentiment. Oakley's portfolio itself (via its own limited-partnership private-equity fund range) consists of a compelling group of around 15 companies, including a holding in recently acquired Alessi, the iconic Italian homewares business.
Safeguard Scientifics: committed to cashing out
Part of the risk in investing in private equity is the maana element: in other words, it's a paper return until it's sold. Safeguard Scientifics Inc. (NYSE: SFE), a US based provider of capital to (currently 15) financial services, media and technology companies, has committed to monetising its entire portfolio. This will need to be done in an orderly fashion to avoid significant discounts; management guidance indicates that another exit is to be completed in the remainder of 2019.
